Consumer NZ is advising car buyers who have been mis-sold mechanical breakdown insurance to demand a refund.

Consumer NZ chief executive Sue Chetwin said the insurance was heavily promoted by car dealers and could add more than $1000 to a vehicle purchase.

But she said the cover was hardly worth having and complaints showed the insurance continued to be sold with misleading claims about the protection it provided.

Comedian Raybon Kan, a Consumer NZ member, was sold the insurance by Palmerston North car dealer Lee European. The dealer claimed the policy would cover faults with the vehicle’s air-conditioning and transmission, which a pre-purchase inspection had indicated may require repair.

However, the dealer not only failed to provide a copy of the policy, it also didn’t tell Kan the insurance excluded pre-existing faults and he wouldn’t be able to claim on it if the air-conditioning or transmission problems turned into a major expense.

Kan successfully took Lee European to the Motor Vehicle Disputes Tribunal, which ordered the dealer to pay $2000 for the insurance and $2200 for subsequent repairs to the air-conditioning system.

“Dealers claim the insurance will protect you if vehicle parts suddenly fail and need repair. But the policies typically have long lists of problems that aren’t covered, including any pre-existing faults with the car and anything deemed the result of faulty repairs,” Chetwin said.

Car buyers already had protection under the Consumer Guarantees Act (CGA) and didn’t need to rely on mechanical breakdown insurance, she said.

“If a car dealer sells a vehicle that’s not of acceptable quality, it has a legal obligation to sort out the problem.”

But an Insurance Council spokesperson said the policies should offer protection beyond the CGA.

“Most mechanical breakdown warranty policies cover wear and tear, as opposed to only manufacturing defects and parts failure, and are available to purchase on second-hand cars. With many second-hand cars in New Zealand being imported from overseas without comprehensive histories, a mechanical warranty offers an opportunity for consumers to be covered for breakdowns of their vehicle which would not otherwise be covered under the CGA.

“Under the Fair Trading Act, warranty providers are required to outline at the front of their policy documentation the rights consumers have under the Consumer Guarantees Act and what benefits and features their warranty provides over and above those rights.”

The sale of a mechanical breakdown warranty at the time of vehicle purchase via credit is covered under the Credit Contracts and Consumer Finance Act (CCCFA). 

This requires that the dealer discloses the existence of the mechanical warranty being sold, the cost of the policy and the cool down period applicable. 

“The dealer must explain the key features and benefits of the policy as well as any limits and exclusions and outline the excess applicable. A copy of the policy must be provided to the consumer and the consumer must be made aware that the policy is optional,” the spokesperson said.

“When purchasing any type of financial product, it’s important people read their policy to ensure they understand what they’re purchasing and that it meets their needs.”